Twenty years on and 2,603% up from its start date; Blackrock ML Gold and General Fund has every reason to celebrate. Nor is there any sight of an end to good times for gold and hopefully the fund yet. According to the London fund manager, Graham Birch, the fundamentals are just “too compelling”.Anyway, as he said at one of the 20th birthday parties, to which the likes of your diarists were invited, gold is actually not that expensive. Certainly it isn’t compared to the price 20 years ago. Doing some inflation adjusting even the previous high of US$850 in 1980 would be worth $2,279 today. And where is gold? Around $920!

Top of those fundamentals he lists, is that there is less and less being produced. Gold production peaked in 2001. It was down by 3% in 2006, by 1% last year. South African production has been falling the fastest. Goodness knows what the regular power outages are going to do to its 2008’s figures!

Mine supply will fall by 10-15%

Letting us in on one of the bits of prime information to which top fund managers are privy, Graham Birch quoted Barrick Gold. Analysis by this top gold producer indicates that “mine supply will fall by 10-15% over the next five years as there is a lack of new production coming on line!”

Exploration spending took off in a big way in 2002 when the miners realised that supplies were running out. Last year the bills ran to over $4bn. Yet the “gold found” line goes remorseless down on the charts. It pitifully only managed to hold around 14m ounces last year. More exploration, the message comes over loud and clear, does not equal more ounces.

Everything is getting more difficult. Not so long ago it might have taken three to four years to get a mine up and going. Now, with global shortages of skilled people and equipment, increasing regulation and environmental obstacles, the whole process is protracted.

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Nor is there is as much gold coming into markets from the world’s central banks. They did not meet their self-imposed sales quotas in 2006 or 2007. At least two are buying. Russia has a target for gold of 10% of its reserves and yet at the moment the level is only at 2.5%. Qatar has been buying. Middle Eastern and Asian central banks are looking at gold as a way of getting out of the dollar.

What is NOT getting more difficult is buying into gold! As Graham Birch pointed out, gold Exchange Traded Funds now account for over 800 tonnes. This makes them the 7th largest holder. And you and me and other small investors are big holders of funds like his. Pension funds don’t seem to understand about making money!

So, we all asked the birthday team, what have they been buying? What’s in the fund that’s made it the most successful unit trust since its launch?

As you’d expect, Graham Birch says they work pretty hard and are “active managers.” He points out that while his fund rose by 2,603%, gold’s gain was 95% over those 20 years.

Picking the smaller and frontier miners

ML Gold and General has been moving into smaller miners and those in the “frontier” territories of China and Russia. Declining gold production has hit the Big Four producers most heavily. And it has spread out from gold into other precious metals, particularly platinum.

His top winner, he says, has been Impala – the world’s second largest platinum producer. Then comes Industrias Penoles, the Mexican silver producer. After that comes, one that he is adding to right now, China’s gold miner Zijin. Then there is Peruvian gold and silver producer Minas Buenaventura.

With $3.2 bn under management, the fund has to hold a spread of companies in the 70% that is in gold mining shares. These, he says, are steady holdings. There is not a lot of movement in the fund’s investments as it is happy with is choices.

The largest gold holding is North American gold miner Kinross, then comes another North American, Barrick Gold. Indonesia’s Lihir Gold is next on the list, then there is Australian Newcrest Mining. The rest, apart from those in the “winners” list are South African Gold Fields and North Americans Goldcorp and Agnico Eagle.

Platinum is represented among the top ten in the form of Johnson Matthey, 4.7% of the total. It is the only non-gold there, and is not even a miner, but a highly sophisticated trader and product producer (like catalysts).

He does hold some bullion. ETFs form around 2.5% of the fund.

Investors are giving the gold price momentum

So, what else? At the moment, he acknowledges, it is investment money that is making gold go round. Investment demand is changing the market dynamics. In 2001 it was 9% of demand. Last year investors had soared to 20% of the market.

Jewellery buyers are being put off by the fact that their money is getting them fewer ounces. This is especially the case in Asia, where gold is bought by weight. Yet the rising middle classes of the developing world still like their gold jewellery. There is no reason to think they’ve gone from the market for good. One thing is for sure, he says. The market environment is “still a long way from a price-related response for the producers!”

So gold will go on getting rarer!

Keep mining.

Erin and Isabel.